US Fed officials see future of rate hikes "less clear"

GS financial conditions index

"The US economy is solid".

The Federal Reserve should be prepared to adjust its policy to protect the USA economy from any sustained pressure from a global economic slowdown and volatility in financial markets, the Fed's second-in-command said on Thursday.

Before those comments, investors had been sending stocks lower out of fears that the Fed would make a mistake and tighten credit too much, possibly sending the economy into a recession.

Why? Powell said recent recessions have been caused by the Fed having to "hit the brakes" to combat high inflation or "asset bubbles".

Powell's comments come amid rising uncertainty since early December, when the Fed raised its benchmark interest rate to 2.5 per cent.

The U.S. central bank raised rates four times a year ago in the face of robust economic growth and unemployment that touched its lowest level in half a century.

Asked about the expectations for the Fed's policy meeting later this month, Powell said, "you should anticipate we are going to be patient and watching and waiting and seeing".

"It will be substantially smaller than it is now", Powell said Thursday at the Economic Club of Washington, adding that the balance sheet needs to be at a "more normal level" without clarifying what that level was.

The policymaking Federal Open Market Committee approved four rate increases in 2018, further indicating two more are to follow this year. "That was conditional on a very strong outlook for 2019, an outlook that may still happen".

While he has near weekly meetings with Treasury Secretary Steven Mnuchin, Powell said he has not met with Trump since taking over as Fed chairman, nor does he have any meetings with the president scheduled.

While there is wide agreement that the US economy will grow more slowly than the roughly three percent rate of 2018, there's a lot of debate about how fast the slowdown will be.

The Federal Reserve Bank indicates it will slow down rate hikes in 2019. But many private economists think the central bank may end up raising rates just once this year if the economy slows significantly.

Those holdings are being reduced slowly as the securities mature, dropping by about $50 billion per month, and now stand around $4 trillion, down from a high around $4.5 trillion. Some policymakers said the Fed could also slow the pace of decline in reserves as it approaches the desired longer-run level.

Part of that message is meant to downplay the significance of the policy projections that officials issue every three months.

"Notwithstanding strong economic growth and a low unemployment rate, inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back to 2 per cent on a sustainable basis, " Clarida said.

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